Reverse Mortgage - What are your objections?

[pianoman9701]

There have been a lot of changes to reverse mortgages since 2012 and people are under a lot of misconceptions about what they are and how they work.  Please let me know what your objections to them are. Maybe I can clear up a few points.

[Magnum_Willys]

Do higher interest rates help when getting a reverse mortgage like they would if I was carrying the contract on a for sale by owner house?

[pianoman9701]

Do higher interest rates help when getting a reverse mortgage like they would if I was carrying the contract on a for sale by owner house?

For sale by owner will have no effect on higher rates if the buyer doesn't pay cash and takes out a mortgage. You, as the seller, would save real estate commissions but might lose that or more at the negotiation table. I always recommend having a good realtor in your corner when selling a home.

A higher rate with a "forward" mortgage means that you pay higher interest each month than you would with a lower rate. With a reverse mortgage, you make no payments. So, depending on the appreciation of your property, a higher rate can bite into your equity more over time.

[Skillet]

Interesting topic.  I think MW is saying that in a higher interest rate situation, an owner contact sale (relator or fsbo) would mean more money in his pocket due to the higher interest rates. So in a reverse mortgage situation, do the higher interest rates mean more cash flow back to the owner while they live in the home vs doing a reverse in lower interest rate scenarios?

Distilled - how do higher interest rates affect cash flow in the reverse mortgage deal vs lower interest rates?

[pianoman9701]

Distilled - how do higher interest rates affect cash flow in the reverse mortgage deal vs lower interest rates?

Interest rates are a part of what's figured into the formula for the benefits and a higher rate would consume equity at a faster rate. Other factors are age (62 minimum) and the amount of equity at closing. So, for example, a reverse at 7% would consume the equity slower than a reverse at 10%. The lower the rate, the more access the homeowner has to the equity, either at closing (Fixed or ARM), or ongoing through the life of the loan (ARM only).

Forward mortgage - equity usually increases. Reverse Mortgage - equity usually decreases. In both cases, higher rates cost the homeowner more money.

[pianoman9701]

Reverse mortgages eliminate your monthly mortgage payment (unless you choose to make payments for maintaining equity). The reverse ends when a maturity event occurs - the borrowers die, the borrowers go into care for more than a year, the borrowers move, or the borrowers don't pay taxes, insurance, or don't keep up the repairs of the house according to FHA health and safety standards. If both spouses are borrowing, the maturity event happens when the surviving spouse reaches a maturity event (above). In these cases, the mortgage ends and the owners or heirs are able to sell the house and take advantage of any remaining equity, if any remains.

[Wetwoodshunter]

Scamming elderly out of their life savings - What are your objections?

[Magnum_Willys]

Thks Skillet, yes I did mean owner-carried contract.  Sounds like higher rates are bad for any type of mortgage.   

I think I get it now.  A reverse mortgage is a loan taken out in lump sum of payments and paid back out of the houses equity when sold or owners passes away.   The higher the interest rate on the loan the faster itveats up equity.

Nothing like an owner carried contract with delayed possession like I thought it might be.

[pianoman9701]

Scamming elderly out of their life savings - What are your objections?

Please explain.

Doesn't feel like you're going to respond with specifics.  First of all, I wouldn't do any job that's a scam, but you don't know me so it's a concern for you. I get it. I DO feel that in the past, they've seemed a bit predatory. Since 2012, reverse mortgages have changed greatly and the changes are designed to protect the consumer. One such rule is that it's now a non-recourse loan. That means that if the borrower(s) outlives the home's equity, the loan still continues until a maturity event occurs (see above). In addition, the heirs aren't responsible for negative equity upon a maturity event. The banks and the FHA are responsible for the negative equity - no one else.

Not everyone needs a reverse. But some elderly, including myself, find themselves at retirement with a limited income, some very little. Something like 45% of people over 65 have savings of less than $10K. They have a house with a lot of equity and are unable to refinance to access that equity  because of their limited income and inability to repay. That gives them a few choices. Sell the home and buy a smaller one. Live with their kids. Have the home foreclosed on. Take in a renter. Get a reverse mortgage and be able to stay in their home without making another payment no matter how long they live.

Some people have enough to get by each month but little extra to pay for going out with friends or dinner, travel, or household projects they'd like to do. The quality of life is reduced by limited income. In some cases, a reverse can help change that. Just eliminating the monthly mortgage payment makes a huge difference without even considering cash disbursements or a line of credit that never has to be repaid. Some have no ability to pay for long-term care insurance and would be stuck if something happened. This might allow them to pay for it.

So, I'm unsure what you mean by "scamming the elderly", but this aint it. There are also massive protections against taking advantage of people with cognitive decline. Someone with power of attorney can get a reverse for their parent(s) only if the POA was given a year or more BEFORE the physician's diagnosis of cognitive decline. Otherwise, they must be granted a conservatorship by the courts, which takes a minimum of 3-6 months. Everyone who applies for a reverse must go through an FHA-approved counseling before being allowed to go forward, to make sure they understand every aspect of what's going to happen. I also interview the perspective borrower to find out if they'll actually be able to live in this house as their mobility declines or if they really want this as their forever home. If they have children/heirs, I want them to be present, as well.

I'd be happy to answer any specific questions you have, either here or on the phone. PM me if you'd like my number or find it on any of my past posts that have flyers.

[pianoman9701]

Thks Skillet, yes I did mean owner-carried contract.  Sounds like higher rates are bad for any type of mortgage.   

I think I get it now.  A reverse mortgage is a loan taken out in lump sum of payments and paid back out of the houses equity when sold or owners passes away.   The higher the interest rate on the loan the faster itveats up equity.

Nothing like an owner carried contract with delayed possession like I thought it might be.

That depends on the type of reverse. A fixed rate reverse, with very few exceptions, pays out a cash disbursement at closing and and you never make a payment again regardless of how long you live or until a maturity event. An adjustable rate reverse has several additional options (that's why over 90% of reverse mortgages are ARMs). You can take a cash disbursement at closing and after one year, have a line of credit to draw from (which will grow), or take term cash monthly payments (terms are like for 5 years or ten years), or monthly tenure payments (payments for the life of the loan), or a combination of some or all of these options, depending on your age, needs, and equity...and you never make a payment again regardless of how long you live or until a maturity event. And YOU own your house, not the bank. The bank has a lien, just like a forward mortgage. And you're on the title, just like a forward mortgage.

[CP]

Since you asked.

I object to any mortgage.  Owning your home free and clear is a big part of true financial freedom.  We should all strive to own our homes outright without any liens or encumbrances.

 

[pianoman9701]

Since you asked.

I object to any mortgage.  Owning your home free and clear is a big part of true financial freedom.  We should all strive to own our homes outright without any liens or encumbrances.

 

I agree. Unfortunately, not everyone can do that. 

[Shawn Ryan]

I deal with a fair amount of reverse mortgages at the point of foreclosure. That means the maturity event has happened: typically, the owner has died or moved to a care facility. Those foreclosures would likely have happened while the borrower still wanted to live in the house, but for the benefits and restrictions of the reverse mortgage. IME, reverse mortgages keep people living in their homes longer than they could without the reverse mortgage.

[pianoman9701]

I deal with a fair amount of reverse mortgages at the point of foreclosure. That means the maturity event has happened: typically, the owner has died or moved to a care facility. Those foreclosures would likely have happened while the borrower still wanted to live in the house, but for the benefits and restrictions of the reverse mortgage. IME, reverse mortgages keep people living in their homes longer than they could without the reverse mortgage.

Thank you for adding a perspective from a professional point of view.  Those are exactly some of the people who benefit. If you can't pay your taxes and insurance or can't keep your house up and are unable to refinance because of your financial situation, you'll lose your home. It's that simple. That's with any kind of mortgage. Even if you own your home outright and can't afford your taxes, the county puts a lien on your house and eventually, you end up being forced to sell, often at a loss.

One of the borrower safeguards a reverse lender uses is called LESA - life expectancy set aside. When the financial assessment of your situation is done and it is determined that you won't be able to keep up with taxes and insurance, money is put aside from the proceeds to pay those in perpetuity, along with eliminating your mortgage payment. There are several safeguards that lenders are required to do to ensure the borrower stays in their home as long as they want or can. Most of these have been added by the government in the last 20 years, but especially since 2012 and 2014.

[Buckhunter24]

Not exactly on topic, but I think if someone elderly is struggling with increased property taxes that there are exemptions/reductions available. Ive seen some properties that have super low tax rates in pretty high tax areas. This goes for disabled too I believe. Good to hear reverse mortgages have had some policy changes, they definitely trapped some people in the past